New Delhi: The government will place a direct tax code in the public domain within 45 days and seek comments from citizens and organizations as it pursues tax reform, the finance minister announced in his Budget speech. The feedback will pave the way for the minister to pilot a direct code Bill through Parliament. Pranab Mukherjee also tweaked the indirect tax structure as he took a step towards a goods and services tax the government plans to introduce by 1 April. And he also expanded the list of activities covered by the service tax. Mint takes a look at what the Budget, and the finance minister, had to say about the tax changes.
Finance minister Pranab Mukherjee set the ball rolling on tax reforms by announcing a timeline on seeking comments on a new direct tax code, and tweaking the indirect tax structure to make it compatible with a goods and services tax (GST) regime.
In an interview to Lok Sabha TV after presenting the Budget, Mukherjee gave a bird’s-eye view of his idea of direct tax reforms. Elimination of exemptions, a simplification of laws, a low-rate environment and an emphasis on voluntary compliance are the main characteristics of tax reforms, Mukherjee said.
Spinning it: The Royal Classic Group textile mill. This year’s Budget proposals moved many items in the 4% slab, including some man-made fibres, to the 8% slab to converge towards the mean rate.
“There are two-three positive steps announced in the budget. First, announcement of direct tax code within 45 days, which people have been asking for (a) long time,” said Sudhir Kapadia, partner at consulting firm Ernst and Young, picking the announcement on direct tax reforms as the best aspect.
The direct tax code has been ready for a while; former finance minister P. Chidambaram worked on it during his stint. Now, Mukherjee has promised to place it in the public domain for comments. Based on feedback, he is expected to eventually start the process of shepherding a direct tax Bill through Parliament.
India’s growing exposure to the international economy has brought forth problems in taxation of cross-border deals or operations.?Mukherjee?has?proposed a fast-track alternative dispute resolution mechanism.
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“From the point of multinational companies existing in India to set up an alternative dispute resolution mechanism for the resolution of transfer pricing disputes is the positive step,” Kapadia said.
A proposal to increase the minimum alternate tax (MAT) on companies has been designed to expand the base by “plugging leakages on account of innovative accounting practices”, one of the Budget documents said.
An increase in tax base is a prerequisite for a low tax rate environment, which Mukherjee hopes to create through reforms. The Budget retained status quo on indirect rates, but simultaneously tinkered with the existing slabs to take a step towards the eventual transition to GST.
GST, the ambitious indirect tax reform planned in India, aims to demolish barriers across states and fiscally unify tax policies and rates across states. The Union government will also be a part of the proposed dual GST structure, which is currently scheduled to be introduced from the start of the next fiscal. The mean excise duty rate today is 8%, and covers at least 70% of the merchandise subjected to excise duty.
The?Budget proposals moved many items in the 4% slab, including some man-made fibres,?to the 8% slab to converge towards the mean rate. This move is expected to smoothen the transition eventually to GST regime, where the Union government and states would separately levy taxes.
Graphics by Ahmed Raza Khan / Mint